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Challenges and Opportunities for NetApp in Fiscal 2016

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Challenges and opportunities

NetApp (NTAP) has been plagued by falling revenues for the past few quarters due to its slower adoption of new technologies, as well as changes in its management. Let’s look at the challenges and opportunities for the company and its expectation for fiscal 3Q16.

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Management changes

In March 2015, NetApp’s senior vice-president and head of FlashRay flash storage array line Brian Pawlowski resigned after 20 years of service to join rival Pure Storage (PSTG), an all-flash array startup. In June 2015, NetApp’s chief executive Tom Georgens resigned a few days after the company announced 500 job cuts.

Challenges for NetApp

While the storage industry was moving to flash, hyper-convergence, object, and virtual machine-aware storage, NetApp was stuck with its traditional Data ONTAP operating system. According to the company’s analysis, the changing IT landscape and constrained IT spending environment saw the traditional standalone hybrid storage market fall at a rate of ~9%. Meanwhile, the market for scale out, software-defined, flash converged, and hybrid cloud solutions grew at a rate of ~20%.

Moreover, the company faced tough competition from giants, like EMC (EMC), that actively acquire new technology, as well as startups, like Nimble Storage, Nutanix, Pure Storage, and Tintri, that offer new technology at a lower price.

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Data fabric strategy

In November 2014, NetApp adopted a “Data Fabric Strategy” with the aim of transitioning the company into a global data management company. Under the strategy, the company has revamped its Data ONTAP products towards the fast-growing segments of all-flash storage, software-defined storage, and converged and hybrid cloud. Its cloud offerings include Cloud ONTAP, Private Storage for Cloud, OnCommand Cloud Manager, and AltaVault. The company is providing the new data fabric solution to Amazon’s (AMZN) Web Services.

The company is also investing in more sales capacity and channel traction.

Is fiscal 2016 a year of transition for NetApp?

Fiscal 2016 could be a transition year for NetApp. The company expects to post growth in the long-term as the above strategies start materializing. For fiscal 3Q16, the company expects to earn non-GAAP EPS (earnings per share) between $0.66 and $0.71 on revenue of $1.4 billion to $1.5 billion. Analysts expect the company to report non-GAAP EPS of $0.70 on revenue of $1.48 billion in fiscal 3Q16.

The Technology Select Sector SPDR Fund (XLK) invests 0.23% of its portfolio in NetApp.

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